Declaring the income tax system has become a running joke, a presidential panel Tuesday recommended rewriting the nations tax laws by eliminating virtually every deduction and credit, and replacing them with simpler benefits for more taxpayers.

One element of the overhaul — to replace the home mortgage-interest deduction with a credit — drew immediate fire from California officials.

Treasury Secretary John Snow said he would study the report, issued by the Presidents Advisory Panel on Federal Tax Reform, and hoped to present formal recommendations to President Bush later this year.

These are bold recommendations, Snow said. These are recommendations that will challenge orthodoxy in a lot of ways on tax policy.

The panel proposed overhauling the popular home mortgage-interest deduction, replacing it with a credit worth

15 percent of mortgage interest paid, to spread the benefit to more homeowners of modest incomes. The panel also recommended lowering the $1 million limit on mortgages eligible for the tax break to the average regional price of housing, ranging from $227,000 to $412,000.

The new limits would apply to new mortgages and to homeowners with an existing mortgage after five years. Tax breaks for mortgages on second homes and home equity loans would be eliminated.

The proposal ran into strong criticism from California officials who said it would hurt people who live in the states hot housing markets.

The federal government should be in the business of making homeownership more affordable, not less, saidSen. Dianne Feinstein, D-Calif. This holds true for all Americans, but especially those in high-cost, high-tax states like California, which has one of the lowest homeownership rates in the country.

In the Bay Area, the size of a mortgage eligible for the 15 percent tax credit would be capped at $412,000 in a region where the median price for a detached home is $709,980.

Its a huge difference. Its not going to benefit the average homeowner in the Bay Area, said Cory Reid, president of the East Bay chapter of the California Association of Mortgage Brokers.

It would leave less money for homeowners to put into things such as day care, college education savings and 401(k) retirement funds, he said.

Feinstein estimated that combined, the reduction of the mortgage benefit and the elimination of state and local deductions would force Californians to pay $31 billion more in taxes every year.

The average Los Angeles County new home buyer would lose more than $9,500 in tax deductions and pay more than $3,100 in taxes every year, Feinstein said. In San Francisco and Orange County, the average new home buyer would lose more than $19,800 in deductions and pay more than $6,500 in taxes, she said.

Some observers questioned whether a comprehensive tax revision could be enacted anytime soon, given Congress preoccupation with hurricanes, war and federal budget deficits.

The timing right now seems a little off, said Lindy Paull, co-managing partner at the Washington National Tax Services of PricewaterhouseCoopers and former chief of staff for the committee that advises Congress on tax matters. To try to do something fairly comprehensive, I think, takes more than the time that Congress will have to devote to it next year because of the election.

The nine members of the commission said key recommendations would be unpopular.

Many stand waiting to defend their breaks, deductions and loopholes, and to defeat our efforts, the group said in a letter to Snow.

Marginal tax rates would be lower for individuals and businesses under two alternative tax systems endorsed by the panel.

Both would eliminate most deductions and credits in an effort to simplify tremendously complicated calculations. The second of the two tax systems aims to reduce taxes on savings and investments made by businesses and families.

Both proposed tax systems would abolish the alternative minimum tax, a levy originally drafted to prevent wealthy individuals from escaping taxation but increasingly reaching into the middle class.

Under one plan, individuals would pay no tax on dividends paid by U.S. companies and exclude 75 percent of their capital gains from taxation. Under the second plan, all investment income would be taxed at 15 percent.

Using a Treasury Department model thats contested by some lawmakers, the panel said both tax alternatives would spur economic growth and increase capital accumulation.

In place of tax breaks, the panel would create a few tax credits and three savings accounts that they said would encourage homeownership, charitable giving and saving while also supporting lower income workers and their families.

For taxpayers, those changes would shrink the length of their tax forms and reduce the need for professional help. Taxpayers at varying income levels would pay roughly the same amount of tax as they do now, the report said.

Also, taxpayers could purchase health insurance using untaxed money up to about

$5,000 for an individual and

$11,500 for a family, a change that caps currently unlimited breaks but would create a tax break for those who do not get health insurance through work.

The panel sharply criticized lawmakers tendency to use the tax code to promote their policy agendas, noting there had been 15,000 changes in tax laws since the last major rewrite in 1986.

Snow and the panels members urged lawmakers and taxpayers to look at the package as a whole, not to concentrate solely on benefits lost.

Very quickly, however, the panel heard criticism of their decisions to limit or scrap deductions for mortgage interest, health insurance premiums and state and local taxes.

Unfortunately, President Bushs tax panel is a Trojan horse, using so-called simplification to cut taxes for the wealthy while increasing taxes for middle-class families, said House Minority Leader Nancy Pelosi, D-San Francisco.

Sen. Jim DeMint, R-S.C., said the recommendations didnt go far enough. We need comprehensive reform that will make America the best place in the world to invest and do business.

Mark Weinberger, a former Treasury Department official who is now Americas vice chairman at Ernst & Young, said successful tax reform is about trade-offs.

Its all about winners and losers, he said. I think tax reform is absolutely going to happen. The question is just when.

The Associated Press and business writer Eve Mitchell contributed to this report.